The stock market this month has been like one of those commercials from a major discount retailer, “Prices are falling all over the place.” These are the times that try the commitment of investors, which flush out those who are unprepared, or unwilling to deal with the volatility that is natural to the investing markets and that, quite honestly, is also what has made it profitable over the years. If the stock market went up on a steady line, so much money would pour in that it would soon become very unprofitable. I have always found a silver lining in volatile markets, whether they be stock, bond or real estate. It has been during those times when others are afraid that I have found my best bargains. The house I am living in right now that I built during the last real estate recession, is an example of that, and reminds me to look for value when others are fearful.
I have noticed I am not alone in my thinking. During the past three weeks, as investors have been fleeing stocks, one very well-known investor has been rushing in. None other than Warren Buffet has been not-so-quietly buying up significant shares in a particular oil company. Can you imagine anyone being dumb enough to buy oil stocks now? Or perhaps he sees other’s fears as an opportunity to buy at a discount, a company whose product he knows the world will need for decades to come.
It is a strange human phenomenon that when a retail store has a big sale (think black Friday) people line up for hours waiting for a chance to buy. Yet when Wall Street has a big sale, (think black Monday 1987, or January 2016) no one is interested. Imagine what would happen if a retailer advertised, “Our prices are higher than ever.” They would be laughed out of town, yet whenever stocks on Wall Street have been at record highs (think 1999) buyers rush in to pay whatever Wall Street asks.
So where do stocks go from here? In the short run, I don’t know. No one knows because short term stock prices are driven by investor emotions which are impossible to predict. Unfortunately, in my experience, the investing masses are notoriously wrong. Google “Dalbar analysis of investor behavior” if you want to read the sad research on this topic.
“Buy low?” Right. That will only happen on Black Friday at the neighborhood retailer. When it comes to Wall Street, prices have been falling all over the place and no one seems interested. Well, almost no one.
Warren Buffet isn’t always right, but he must be doing something right to be one of the richest people in the world. If you ask him his secret he will tell you. Just like any Black Friday shopper, he likes a good bargain.
Come to think of it, so do I.
**Investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than their original value. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Past performance is no guarantee of future results. Talk to your financial advisor before making any investing decisions.**
My son Jared and I went to the airport this week to train in a device designed by the Air force to teach pilots how to recognize and deal with hypoxia, which is the sickness that occurs with oxygen deprivation. The altitudes at which I fly give the most beautiful views, but right outside that thin window pane is a world that is very hostile to human life. The air is generally about -35oC and only contains 7% oxygen. Breathing air with so little oxygen quickly leads to loss of brain function and eventual unconsciousness. The chamber taught us to recognize the onset of hypoxia so we could take action while our minds were still clear.
It was fun watching through the glass as other groups experienced the chamber. After just a couple of minutes, brilliant pilots would be unable to perform the simplest of tasks, yet all the while thinking they were doing great. In a cruel hoax of nature, a person with hypoxia loses the ability to reason, yet feels a sense of euphoria that all is well. Thus, depressurization can quickly lead to a very poor outcome if proper action is not taken.
When investing markets go through rapid changes, investors can sometimes suffer from a form of investing hypoxia. Tasks that were once easy and logical become more difficult under the pressure and strain. As if the air has been sucked out the room, a rapidly moving market can lead investors to make poor decisions they would never make when all is running smoothly.
The purpose of the chamber was to teach that at the very first sign of hypoxia, you are to put on your oxygen mask and take a few deep, but calm breaths. When your thinking is clear, you are then in a good position to deal with the situation. As it turns out, most events that cause a plane to depressurize do not threaten the safety of the flight. It is a pilot’s potential poor reaction that can create an emergency. Likewise, in investing, market volatility is rarely a problem in and of itself, but a panicked investor can turn it into a problem by making unwise decisions. In those situations, sitting back and taking a few deep breaths before proceeding is a good practice.
In the late 70’s it was popular to follow many motivational speakers who promoted the idea of creating success by maintaining a positive mental attitude, or PMA. I knew many who put notes on their mirrors and fridges, reminding them to maintain a PMA. I clearly remember one day talking to my Dad about the PMA craze and a book I was reading on the subject. His quick response was “A positive attitude is worthless without positive actions.”
The New Year is a traditional time to set resolutions. A few weeks later in January is unfortunately a time when most of those resolutions fall onto the heap of forgotten goals and dreams. Like the PMA craze, we want to be better but many have a difficult time following through.
I work with many successful investors who would not be considered financial experts, yet managed to build substantial fortunes on relatively average incomes. I have spent some time compiling a list of actions my successful clients have taken throughout their lives and offer some of them here as possible New Year’s resolutions for others. If there is something here you are not doing, don’t just think of it as a good idea for a resolution – take my Dad’s advice and follow through with real action.
1 – Have a written plan for where you want to be and how you are going to get there. Be realistic about your needs and wants and adjust your plan as needed.
2 – Establish a systematic savings/investing plan and implement it beginning today.
3 – Do not live above your means or even at your means. Live below your means, saving the excess for future opportunities or a rainy day.
4 – Never borrow money unless doing so will enrich your financial situation, not weaken it.
5 – Create an investment portfolio that wisely manages needs and risk. Keep it simple, sticking with things you can reasonably understand.
6 – Find someone outside of your own home to consult with before making major financial or investment decisions. Sometimes a financial advisor’s most important job is to prevent you from doing something foolish when you are under stress.
7 – Don’t be such a cheapskate that you can’t enjoy life. If you’ve saved and invested well, you deserve to be able to spend it.
8 – Lose the negative attitude so prevalent these days. What good is a life filled with worry and fear? Have faith in yourself, your fellow man, and your nation. After almost 250 years the message of America is one of tremendous success over occasional trials.
9 – Don’t be afraid to make mistakes. Successful people understand failing is sometimes part of life, but learning from it brings future success.
10 - And finally, be very careful where you get your information. In our age of information we have unfortunately become a society of great misinformation.
Resolve to make 2015 the year you take all those sticky notes off your mirror and put them into action. Happy New Year!
Will Santa Bring a Market Rally?
Every Christmas season I am asked if I believe we will have the traditional “Santa Claus Rally.” The stock market often rallies between Christmas and New Year’s Day, though I believe some people get a little overly excited about it. Of course next month they will ask about the “January effect,” then the “Spring bump,” the “Summer Doldrums” and on it goes. Traders who follow various almanacs are able to point to countless market trends for every season or event throughout the year. I like to say that trends are only trends until they aren’t. And when they aren’t it can get really ugly for those who invest based on them. Just ask someone who bet the farm after an NFC team (New York Giants) won the 2008 Super Bowl. That was supposed to indicate a great year, but we all know how well that turned out.
These questions often lead me back to a friend of mine who manages several billion dollars for one of the world’s largest money managers. Most investors measure the daily movements in their accounts in hundred dollar bills, but this man watches his accounts move enough each day to buy or sell several Las Vegas Strip hotels. I asked him how he dealt with the stress of all that responsibility. His answer was simple. “I don’t care where the price of a stock is going tomorrow. I only care where that company is going to be in five years.” My friend makes decisions every day that affect the life savings of thousands of people. His long-term view reduces stress in his job while providing a great benefit to his clients, especially now when things like short term pricing issues in the oil markets are causing so much grief around the world. He recognizes this is a temporary problem that will likely have little effect beyond a few months.
Unless you plan on being a day trader, it doesn’t make any difference what happens between Christmas and New Year’s Day. As my friend understands, where the stock market is going tomorrow has no bearing on whether or not you will be able to enjoy your retirement over the next several decades. Making investing decisions based on short term trends is about as smart as buying a home in Anaheim because you are planning a trip to Disneyland.
During the time of year when people are thinking of setting goals, take a look at your financial compass and make sure it is focused far off on a goal that is unmoved by the waves of the day. This is especially true in a day when weekly swings in the Dow Jones Index of nearly 1000 points are becoming very common. By keeping your eye focused on a distant goal you can truly enjoy the “Santa Claus Rally,” which should be to rally around those things in life that really matter during this special time of year. Merry Christmas.
Hi, I'm Dan. I'm a CFP® Professional.
Securities and advisory services offered through Commonwealth Financial Network®.
Member www.finra.org / www.sipc.org , a Registered Investment Advisor. Wyson Financial, 1173 S. 250 W. Suite 505, St. George, UT 84770.
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